Petrol taxes have outlived their usefulness

Dr Patrick Carvalho
The National Business Review
28 April, 2019

When it comes to funding our roads, the average New Zealand driver is not getting the best deal.

For one, we have been paying for our streets and highways roughly the same way for the past 50 years, despite technological advancements and global best practice.

Our system is also inherently unequitable, with drivers from low economic backgrounds most likely subsidising more affluent car owners.

Worse, congestion delays in urban centres are the new normal, with direct and diverse negative impacts. Traffic jams are estimated to cost our economy nearly $1.25 billion a year, while contributing to higher levels of pollution and road crashes.

If “mobility is the lifeblood of commerce and community,” as Transport Minister Phil Twyford says, then the road system is in an anaemic state longing for a renewed policy transfusion.

The good news is that a well-tested solution to the road funding malady exists – and it is within our reach.

Old-fashioned way
If you drive to work, go shopping, or drop your kids at school, you are not alone. Close to 80% of household trips are by car, with four out of five fuelled by petrol.

No wonder petrol taxes have been an important part of government fiscal strategy since the 1970s. Petrol duties today account for more than half of all Crown receipts going toward road maintenance and development.

The reason behind the time-tested success of petrol taxes is their relative convenience: low administrative costs, high compliance rates and seamless payments. What’s not to like?

Well, as it turns out, petrol excise duties are not as virtuous as they seem.

Under our fuel tax regime, a driver basically pays the same amount of petrol duties regardless of when and where the car is used – thus adding to the congestion in already overcrowded roads.

Moreover, fuel taxes are blatantly regressive, which means low-income families tend to bear a disproportionate share of road funding costs.

To understand the regressive feature of petrol taxes, it is necessary to look at the relationship between fuel economy and road usage.

The rationale for petrol taxes lies in the user-pays principle. In this sense, the fuel excise duty would be a proxy for road usage: the longer the distance travelled, the higher the tax dues.

Petrol tax receipts are, however, proportionate to fuel consumption patterns. This is in contrast to road user charges on diesel-powered vehicles, which charge drivers based on the exact mileage travelled.

The problem is that different petrol vehicles have different fuel economy features: Older, cheaper cars (that is, the ones most likely driven by low-income families) are notorious gas guzzlers.

This is particularly concerning when 60% of the light vehicle fleet are more than a decade old, and one in four passenger cars were manufactured before 2000.

Fuel efficiency can have an immense impact on a driver’s petrol tax liability. Based on government guidelines, average petrol consumption can go from 2.9 litres per 100km (highly efficient vehicles) up to 19.6L per 100km.

Even the government recognises that “ideally, to ensure fair charging, petrol vehicles would be subject to road user charges as well.” However, the convenience of petrol taxes gets in the way.

But it should not be the case.

A better way
New Zealand should look at well-tested road pricing experiences worldwide to implement a comprehensive user-pays system based on three elements: distance, time and location.

Road pricing is not a new concept, dating back to the seminal work of Nobel-laureate William Vickery in the 1950s and ’60s and of Arthur Pigou in the 1920s.

Technological challenges, however, have been a major barrier in introducing proper road pricing policy.

Not anymore.

Singapore, which started with a paper-based scheme in 1975, will implement a new network-wide, satellite-based road pricing system as early as next year.

Several other countries – including the US, the UK, Germany, Canada, Japan, Sweden and Norway – have also implemented different versions of road pricing arrangements and technologies. These are useful test cases, providing both success stories as well as lessons.

It is time New Zealand joined global best-practice in managing and funding its roads and highways.

First, outdated fuel taxes must go. Petrol-powered cars should be migrated to existing distance-based road user charge scheme in line with diesel-fuelled vehicles.

Second, without fuel taxes, the carbon footprint of cars should be consistently priced using the Emissions Trading Scheme. Further regulatory and explicit subsidy arrangements may also follow, helping address any remaining environmental concerns.

Third, congestion charges based on time and location would ensure a more reliable, faster and safer traffic flow. Evidence shows that even small but flexible charges can have a significant positive impact on road demand management.

As Professor Vickery once said, “You’re not reducing traffic flow, you’re increasing it, because traffic is spread more evenly over time. Even some proponents of congestion pricing don’t understand that.”

Fourth, while distance-based road charges should be the main source of road funding, congestion charges based on time and location should be used to reduce car queuing in busy roads. Hence, any additional net revenue from congestion charges should be ring-fenced to ease respective local traffic conditions.

This would include supporting alternative routes and transport modes in the affected community, while creating incentives for more efficient car use (e.g. carpooling).

Audacity of hope
The science behind a successful road pricing solution is clear and well-documented.

Properly done, road charges based on distance, time and location are an effective tool to improve the lifeblood of our commerce and community.

What New Zealand needs now is the political will (and courage) to implement the changes: A brave new world awaits us – but only if we transport ourselves in the right direction.

Stay in the loop: Subscribe to updates